Net Lease REITs: The Right Kind Of Retail?

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• Despite mounting concerns of a “Retail Apocalypse 2.0” given the unexpected surge in store closings this year, net lease REITs have bucked the negative retail trends and continue to outperform.
• Net lease REITs have become adept at swimming upstream against these retail-related currents. The top net lease REITs command clear competitive advantages over the private market through access to capital.
• While nearly two-thirds of a net lease REIT’s revenue comes from retail-based tenants, it’s primarily the “right kind” of retail. Restaurants, convenience stores, fitness, and home improvement are top tenants.
• Amid the search for yield, however, we think that investors discount the retail-related risks in other critical net lease sectors including pharmacies and movie theaters with higher risk of disintermediation.
• The net lease sector has been revitalized by lower interest rates, which has boosted equity valuations and re-opened accretive external growth opportunities that should fuel AFFO growth this year.